MBS RECAP: 12/20/2011

Late November definitely felt like more of a sell-off than today, but in terms of single session 8am-3pm losses, 10yr yields rose the most since October 27th, just over 10 basis points. Although MBS weathered this storm quite well (discussed earlier, in more detail HERE), there's only so much spread tightening to be done before MBS have to give up a few ticks.

Other than the very slight potential for lenders to reprice for the worse, weakness in 10's isn't all that troubling at the moment considering trading levels and low volume. In this thin, year-end liquidity, it's not uncommon to see prices and yields pushed around further in any given direction than they otherwise would be. Moreover, the fact that today's Treasury sell-off kept 10yr yields within a trend channel is actually a good thing for MBS in the longer run as it indicates a bit less volatility in one of the benchmarks against which MBS are valued. To oversimplify, the flatter and more predictably 10's can trade, the tighter MBS yields can move to 10's, resulting in lower rates relative to more volatile alternate realities.

Check out the trend-channel in 10yr yields mentioned above in the most recent MBS Commentary:

Shortly after 10yr yields broke an intraday supportive ceiling just over 1.91, Fannie 3.5's also gave up the fight at 102-13 / 102-14, falling a few more ticks to their lows of the day at 102-11 currently. This has been enough for the price leader to recall sheets, or perhaps in combination with a need to peel off some previous aggression in a "no-longer-blatantly rallying" MBS market. Because a 6 tick gap to the highs of the day is questionable reprice motivation in and of itself. Still, if one lemming jumps, others may follow, especially if MBS prices deteriorate further.

Bid-to-Cover has been in the high 2's, low 3's all year with the last auction on 11/22 hitting 3.15. The 4 auction average stands at 2.95.

All of the last 4 auctions stopped through with slightly lower than expected yields (Auction "high yield" vs. 1pm "when-issued" yield), although it's notable that the largest misses and weakest covers occurred last December with a 0.047% tail and a 2.65 bid-to-cover.

WI is currently at 0.886.

Bond markets continue to weaken as European peripheral markets are generally more upbeat after receiving their promised holiday gift in the form of the 3yr loans being handed out by the ECB (LTRO or "long term refinance/repo operation"). We don't have details yet on which countries borrowed which amounts (tomorrow morning around 930am EST), but with expectations ranging from 150-550 billion Euros, this is a pretty big deal. As opposed to the ECB directly stimulating various parts of the ailing EU sovereign debt landscape, they can simply hand out loans so that countries can stimulate themselves...

So far, this seems to have excited the "risk-on" trade as stocks and bond yields are up moderately. We'd be careful not to chalk too much significance up to what is essentially a shuffling, but not elimination of debt (LTRO is basically a 3yr loan), especially when volume remains fairly thin and pre-auction and even technical considerations can be argued to be dragging bond yields higher as well. The better-than-expected Housing Starts reported earlier don't factor into these swings much.

Either way, it's interesting and perhaps a bit surreal to consider that 10yr Treasuries have "sold-off" 26/32nds in price, 8.9 bps higher in yield, to 1.899. Let that be a caveat to the terminology. We don't really consider anything that happens under the previous range boundaries--at their lowest, in the 1.94's--to be a legitimate "sell-off" or "rally." Whatever terms used to describe bond market losses so far this morning, one thing's for sure: it's all been a very orderly affair, mitigated only by a brief spike outside a narrow range following the release of details on today's round of Fed buying in the long-end.